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The Finance Minister views the Country’s Economic Growth with Optimism

Published: July 1, 2013 | 8:24 am
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Nodar Khaduri: “regardless of what the growth rate will look like in 2013, the State will pay all its expenses and liabilities from within the Budget, without taking out any additional loans.”



Projects within the energy sector, agriculture, food, recycling, tourism and transport. These are the areas which have attracted interest from local and foreign investors, the Georgian Finance Minister has told the Monitor. According to Nodar Khaduri, Georgia has seen investment of 240 million USD during the first financial quarter. The second quarter results are due in September. Mr. Khaduri states that the presentations of various investment funds are also planned for September. These funds will further help businesses to become more proactive, and to attract investment.

- Which steps have you been able to take during the past few months, and are you in a position to say that your office has managed to change things towards the better for individuals and businesses in any way at all?

- This is an interesting question, which cannot be answered in short, but I will try to emphasise the most significant points. First of all, right after taking the office, we have made serious steps to ensure transparency within the Budget, and for the spending of taxpayers’ money to become more transparent and effective.

Secondly, we have rid the Budget of spending on projects that were questionable at best. We have then used these savings to carry out a number of important social projects. These include pensions, universal health insurance, social benefits, and improving the conditions for the IDPs. Equally, we must not forget the problems faced by the business sector under the previous regime, most notably from the perspective of justice and fairness. The Finance Ministry has addressed these issues, and by taking steps such as simplifying the working process for the Council of Disputes, and making it more transparent, we have given businesspeople the opportunity to present their grievances directly to us, instead of having to seek justice further away.

We have also made a number of significant changes to the Tax Code, which have helped businesses considerably. These include a new system of taxation for businesses working in the agricultural sector, an untaxed monthly minimum of 150 GEL for the socially vulnerable, and raising the income tax threshold for people with disabilities to 6000 GEL.

As you can see, we are taking certain steps. I will not claim that these will radically improve either the business environment, or people’s social conditions within a day, but we are making serious efforts in this direction. From 1 September, the pensions will be equal to the living minimum wage. Social benefits have already doubled. Businesses are now free, and we are communicating with them through legal channels only. This means that the business sector will grow stronger. Already from the visits that I make to factories and other manufacturers, I know that businesses have hope that their situation will improve, and I am happy about this.

- There has been talk about this since the beginning of the year, and recently, a number of international financial institutions have also come to the conclusion that there is a lack of communication between the government and business. Does your office accept this accusation, and what does it actually mean to have good communication with business?

- I’m not claiming that everything good has begun with our coming to the office, but let’s look at the Finance Minister’s example – at no point during the last 19 years has anyone in this office held more meetings with various businesses, including public meetings, than we do now. On five occasions alone, we have held large meetings with members of business associations – between 100 and 150 businesspeople at a time. We are holding meetings with investors, potential investors and other businesspeople here at the Finance Ministry, and we make a multitude of personal visits to various manufacturers. I will continue to make these visits, in order to find out about the problems and issues facing the businesses at first hand. Therefore, I don’t see any lack of communication at all. I cannot meet all 300 000 registered businesses in Georgia in a single day, but I am in constant talks with business associations, the Trade- Industrial Chamber, the American Trade Chamber, and others.

-You are making certain changes to the Tax Code. Are the ambiguous clauses within the Code, which have been the source of many complaints from the businesses, still an issue today, and if they are, then how do you intend to resolve this problem?

- We have already made a number of changes to the Tax Code this year, which should make it easier for us to tackle this problem. Unfortunately, there is a multitude of such ambiguous clauses, including such that members of the Finance Ministry have disagreements about – people who were involved in writing these clauses and recommending them to the legislative body in first place. Their explanation – “this is the way I used to think at the time when I was writing them.” Our task now is to go through this process together with the businesses, and make sure we communicate with each other as we make any changes, so that we read from the same sheet. We have already taken a number of steps, but the Code is a large volume, and everything cannot be rectified within a day. To be frank, making improvements to the Tax Code is a constant process, it is not a statistical matter. Changes will often be made, of course, but they will not take place immediately – only after a certain period of time, to allow businesses to adapt to them.

Some of the first changes that we made to the tax legislation included the removal of a number of powers from the Finance Ministry. It is unacceptable for a Finance Minister to be able to alter the Tax Code as he wishes, and depending on what mood he is in, forcing his personal interpretation of various matters upon the taxpayer. If it is felt at the Finance Ministry, the Tax Office, or by others involved in administering financial matters, that something within the law needs to be changed, then it is better to wait for these changes to go through all the necessary channels before taking effect, and allow the population plenty of time to adapt to them, instead of the Finance Minister signing something today, and it becoming the law tomorrow. Unfortunately, not all businesses in this country are spoiled with having good lawyers and audits, having constant access to a computer and being able to see what happens on the Finance Ministry’s website. They often rely on other channels for information. Finally, we also think that some of the Ministry’s powers should be repatriated to the Parliament, and have already done so with certain ones, such as the power to set interest rates.

- You have previously explained on numerous occasions, why you think that the economic growth slowed down at the beginning of this year, but on what grounds are you optimistic that it will pick up again?

- Unfortunately, we did not have a good first financial quarter, but I think that it was far from being disastrous either. Developments of this kind frequently happen after elections, especially when a radically different government comes into office. For example, there was a 12% growth rate in Georgia in 2003, but only 4.5% in 2004.

Businesses tend to wait for a government’s announcements, policies and actions. On 5 October, the Prime Minister told the businesses that his main message to them was that they were free. Henceforth, nobody would be forcing them to renovate Sighnaghi or other towns at their own expense. Nobody would force them to invite pop stars to Georgia, and organise grand concerts in Tbilisi and Batumi at their own expense. Businesses have understood this message, but they are still waiting for these promises to be implemented. The post-election period seems not to have been sufficient to remove the deeply rooted fears from the past, when the previous administration was squeezing businesses like lemons. There had been massive amounts of ‘pre-paid’ monies within the State Budget – we are talking about sums of close to 1.5 billion GEL. Moreover, businesses had been forced to carry out unreasonable spending on various projects, regardless of whether they would see any gains from those. Numerous loss-making investments had been made in this manner.

All things considered, it is only too understandable that business is currently drawing its breath. I sincerely hope that the second half of the financial year will be a lot better, but let me make this absolutely clear: regardless of what the growth rate will look like in 2013, the State will pay all its expenses and liabilities from within the Budget, without taking out any additional loans.

- Standart & Poor’s have come to the conclusion that the Budget deficit will be higher than planned. Is there such a danger?

- At the moment, we still expect 2.9% to be the ceiling, as far the Budget deficit is concerned, but in any case, the deficit will not be catastrophic. We expect there to be a deficit within the 3% mark, due to several obstacles and delays. Having said that, there are still over 400 million GEL on the State Budget accounts, to be spent on various projects as outlined within the budget report. Apart from that, there is a constant stream of income from taxes, even though everything is being administered in a much more civil and humane fashion, than before. Therefore, I do not expect there to be a deficit of catastrophic proportions.

- Will the presidential elections act as a distraction in the efforts to achieve economic growth as planned?

- Naturally, politics always have an impact on procedures, especially since we are in an election cycle: we’ve had parliamentary elections in 2012, there will be presidential elections in 2013, local elections in 2014, and then after a brief break, another parliamentary elections in 2016, and so on. We live in an interesting country, we constantly have elections. However, I don’t think that too many people are in doubt about what the results of this year’s elections will be, so there should not be too much uncertainty.

One can, of course, envisage a scenario in which the President and the parliamentary government will still be representing opposing factions after the October elections, but even such a scenario should not be a source of uncertainty or confusion, bearing in mind that presidential powers are being reviewed and reduced, and a number of changes to the Constitution have already been made in this regard. Therefore, I don’t think that we should expect any political cataclysms during the period before or after the elections, and I do not expect the businesses to think so either.

- Will the Prime Minister’s possible departure from politics after the presidential elections, to which he has hinted, deter potential investors who would be looking for a stable environment?

- I don’t know why some people have been surprised by the Prime Minister’s statement. Mr. Ivanishvili made it clear from the beginning that he was not planning a prolonged stay in politics, and that it was more important for him to establish accountability of the State towards the society. At the same time, the Prime Minister has made it absolutely clear that he will only be stepping aside if he feels that the parliamentary team will be capable of doing their job just as effectively with his assistance, but without his personal leadership. Therefore, I do not think that the situation for businesses would worsen in any way by Mr. Ivanishvili’s departure.

Investors are people who take time to get moving. Think of a large train which takes some time to get going and pick up speed, and then takes an equal amount of time to slow down and come to a halt. We are dealing with a similar situation here. I think that the business sector will get going very soon, and stopping it will then become unimaginable.

- What is the level of interest shown by potential investors, and is there any specific interest? Has the Prime Minister’s announcement about the presentation of investment funds come too late?

- I communicate with a multitude of investors and potential investors. I have meetings with people from various fields of interest almost on a daily basis. These are people who have an interest in the construction sector, in agriculture, in food and recycling industries, in certain energy projects, in transit, and in tourism. There is a broad spectrum of areas which are of interest to both local and foreign investors.

Investment worth 240 million USD has been carried out during the first financial quarter. The second quarter is not yet finished, and we will have the results later on, near September. This is also the period for which we are planning the presentation of the investment funds, although the agricultural investment fund is already up and running, and I would like to say that a record amount of Georgian land has been ploughed this year, allowing us to take steps to try solve many food safety problems as early as this year. The investors should find it attractive that their risks will be spread out and neutralised with the help of such a fund, and I can tell you that there are numerous very serious private investors waiting to contribute to these funds, which will be established and become fully operational very soon.

- Have there been any problems with the Budget income? Your opponents are predicting a Budget sequester after the presidential elections.

- Here I’m reminded of the words spoken by the great poet Akaki Tsereteli at Ilia Chavchavadze’s funeral: “just because some think and wish things to be true, does not mean that they are.” I would like to assure the Georgian people that there will not be a Budget sequester, and no spending reductions are being planned at all. The saving that have been made by abolishing useless, ineffective projects, have been enough to meet our targets for social projects this year. I don’t think anyone will hold it against us if we don’t build a third Parliament building somewhere. One ‘Tower’ is as sufficient for Batumi, as one Public Hall is for Lazika, where nobody lives. Senseless projects are no longer being carried out.

As for the serious projects on infrastructure, works on a large section of the highway between Ruisi and Agara are in full flow. Works on the Tbilisi-Rustavi highway have already begun. I have personally inspected the progress of the works on the Kutaisi bypass road. We have allocated funds for the completion of the resorts at the Goderdzi Gorge in Adjara, and in Mestia; for the completion of the road between Kobi and Gudauri; for the rehabilitation of the sewage and water systems in Kutaisi and Batumi; for garbage dumps in virtually every large town. As you can see, the government is carrying out a serious amount of work, and there are no obstacles in the way of any of the aforementioned projects. Most importantly, none of the social projects will see any delays at all.

- What form will the Council for Disputes at the Finance Ministry take in the end? Are the reforms complete in this regard?

- The first radical reform was conducted by us right after taking office, when I invited members of Non-Governmental Organisations to join the Council for Disputes on a rotational basis, with 2 NGO members being present at the Council’s sessions at all times. Audio recordings of very session of the Council are now available for people to listen to, and soon we will have them recorded on video as well. Every decision reached by the Disputes Council will be available for viewing on the Council’s own website. The degree of the Council’s independence will also increase. To me, it is a very significant fact that 60-70% of the complaints are being upheld by the Council, meaning that the decisions are being made in the taxpayers’ favour. We try to hold our meetings on a weekly basis, as there are over 600 disputes that have been submitted to the Finance Ministry. In fact, we are meeting again tomorrow.

I would like to add that the reform of the Council for Disputes is a constant process. If there’s any need for us to carry out any further structural changes, then we will meet and do so. However, we are not going to reinvent the wheel. There are international models available for us, and we are constantly being assisted by our American colleagues, the US Treasury, the European Union, the IMF, the World Bank, and others. With their help, we will make the Disputes Council more transparent and effective. Transparency is the most significant issue. If everyone can follow the process, then naturally, fewer questions will arise. For example, no one will need to ask why, as it happened under the previous administration, people could get away with not repaying 60 million GEL which they had taken out of the State Budget. We are not planning to work in this manner.

- There has also been some talk about the changing the institution that is the Alternative Audit. Have any decisions been made in this regard, and has this project been successful at all?

- The Alternative Audit is a very interesting project. We can talk about improving this institution from many different angles. Of course, there are certain risks, and our international friends – the IMF, the World Bank, etc. – are advising us that certain changes do need to be implemented to the project. We are working on this, but no final decisions have yet been made. Not only are we not rushing any decisions, but we also do not take them without prior consultation with the businesses. In this specific case, we have yet to reach any firm conclusions, although we do have our own views on the subject. There are certain areas where the Alternative Audit is needed, and there are those where it is not needed.

- Finally, I would also like to ask you about the Soviet-era savings accounts. How realistic is it to have the money returned, and when will the commission which is working on this issue announce its conclusions?

- This is a very complex issue. I would like to view the cases of the Soviet-era savings accounts, and of the Soviet-era cooperative building projects together, since they collectively constitute the problem of a ‘historic debt’ for us. There is a commission working on this issue, but it will be unable to solve all the problem accumulated over the past 25 years. We have been facing this issue since 1989-1990.

During the pre-election campaign, we have promised to do recount this ‘historic debt,’ and even here, we are facing numerous challenges. For example, people have in past received partial compensations for their losses in the cooperative building projects, in the form of either cash or property. Now some of these people are once again demanding to have their properties given to them. Similarly, certain amounts from the Soviet-era savings accounts were repaid in 1998. There followed a recount of the sums owed to people, and whether the recount was conducted in a fair manner, is also something which we have to try to establish. All I can say is that we are working on it, together with our colleagues.

The commission’s report will only be the first stage of bringing this process to a conclusion. The next stage will be to establish the mechanisms which might be used to repay some or all of the sums determined by the commission. We have agreed to absorb these funds in form of the State’s ‘inner debt,’ but as of yet, the mechanisms for returning any of these funds to people are not in place.

Even while being part of the parliamentary opposition, I have always tried to refrain from making any wild promises or undocumented statements. When you are in the government, making any misleading statements would be completely unacceptable. Both our Ministry and other Departments are working on these issues, in order to provide people with definitive answers, but for me to promise that there will be an answer today, and that the money will be handed out tomorrow, would be irresponsible.

Koba Alkhazashvili

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